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A depository is an organisation which holds securities (like shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form at the request of the investors through a registered Depository Participant. It also provides services related to transactions in securities. At present two Depositories viz. National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) are registered with SEBI. The minimum networth stipulated by SEBI for a depository is Rs 100 crore.
A Depository Participant (DP) is an agent of the depository through which it interfaces with the investor and provides depository services. Public financial institutions, scheduled commercial banks, foreign banks operating in India with the approval of the Reserve Bank of India, state financial corporations, custodians, stock-brokers, clearing corporations /clearing houses, NBFCs and Registrar to an Issue or Share Transfer Agent complying with the requirements prescribed by SEBI can be registered as DP. Banking services can be availed through a branch whereas depository services can be availed through a DP.
Key Features of the Depository System in India
The depository model adopted in India provides for a competitive multi-depository system. A depository should be a company formed under the Companies Act, 2013 and should have been granted a certificate of registration under the Securities and Exchange Board of India Act, 1992. Presently, there are two depositories registered with SEBI, namely:
1)National Securities Depository Limited (NSDL), and
2)Central Depository Service Limited (CDSL)
Securities in Dematerialised Form:
The depository model adopted in India provides for dematerialization of securities, which is more or less similar to holding funds in bank accounts. Transfer of ownership of securities is done through simple account transfers. This method does away with all the risks and hassles normally associated with paperwork.
In general sense, Fungibility is a good or asset’s interchangeability with other individual goods or assets of the same type. Assets possessing this fungibility property to simplify the exchange and trade processes, as interchangeability assumes everyone values all goods of that class the same. Many diverse types of assets are considered to be fungible.
In the depository system, the securities dematerialized are not identified by distinctive numbers or certificate numbers as in the physical environment. Thus, all securities in the same class are identical and interchangeable. For example, all equity shares in the class of fully paid up shares are interchangeable.
Registered Owner/ Beneficial Owner:
In the depository system, the ownership of securities dematerialized is bifurcated between Registered Owner and Beneficial Owner. For the securities dematerialized, NSDL is the Registered Owner in the books of the issuer; but ownership rights and liabilities rest with Beneficial Owner. All the rights, duties and liabilities underlying the security are on the beneficial owner of the security.
Free Transferability of Shares:
Transfer of securities held in dematerialized form takes place freely through electronic book-entry system. The system dispenses with the transfer deed and other procedural requirements with respect to transfer of securities.
No Stamp Duty:
No stamp duty for transfer of securities in the electronic form is payable. In case of transfer of physical shares, stamp duty of 0.5 percent is payable on the market value of shares transferred.
All risks associated with physical certificates such as delays, loss in transit, theft, bad deliveries, etc. are eliminated in the depository system.